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Discuss // How would you set terms for potential co-founder when you aren't incorporated?

How would you set terms for potential co-founder when you aren't incorporated?

I would like to build an MVP for an app idea. I'd like to find a co-founder, but I'm not incorporated yet - I'm an international student, and the process seems a little confusing. How do I set terms (compensation incentives etc) for a potential co-founder? My intention was to first aggressively build the MVP, test market fit, and then get into incorporation and other legalities. How do I make sure that incentives are only a function of performance? In general, how do I approach the situation?

4 Replies

Just get a founder's agreement drawn up. Use a template or convince a
lawyer to work with you with deferred payment until you hit a certain
benchmark ($100K raised should work.) In the founder's agreement, have
reverse vesting (basically, you initially have no right to the shares
reserved for you, and they become released slowly over a certain time
period, 3 years is normal; this avoids a tax event when you get a term
sheet) for both of you, with a cliff (meaning, if you or your cofounder
walk within a year or six months or whatever, you get no shares at all.) My
recommendation, actually, is for you to work together for a month or three
before even signing the founder's agreement-what if you end up hating each
other, or your work styles clash or whatever?
Also, you should seriously consider revering the first two steps in your
game plan, meaning, test product-market fit FIRST, then aggressively build
an MVP. That might mean doing a smoke-and-mirrors test, if you want to
drink the Lean Startup Kool-Aid (some mockup that promises to do what you
want the MVP to do, to see how many people sign up.) For sure you should do
100 interviews (not surveys) with representative potential customers, 15
minutes a pop, being careful not to foreshadow the answers you want to
hear. Why? Well, we all think we know exactly what the customer wants, but
then it turns out that they only really want 50% of the functionality we
thought they needed, and the rest is wasted effort, but there is some
functionality we never thought of which the customer would absolutely kill
for. By testing market fit before building the MVP, we can more efficiently
allocate resources when we sit down and start building. It might turn out
that the core functionality the customer wants is easy to make with
Wordpress or whatever, and then you can avoid spending a ton of time and
effort coding and dedicate those resources to marketing or fundraising.
Etcetera.
Feel free to drop a line if I can help further.
Sincerely,
Baruch

Just have a simple one pager, and start from there. Trust is equally important as legal agreements.

Don't invest time and money in a lawyer for cofounder agreements and incorporation before you have the sense that your project will go anywhere, and that you will be able to work together for many years.

Co-Founder,President and CEO, Society of Physician Entrepreneurs at ceo@sopenet.net

In bioscience, IP, regulatory affairs and reimbursement issues are more pressing than in other domains. In addition, you might have to deal with technology transfer issues as part of the innovation roadmap if you engage academic faculty in product development. That means you will have to identify co-inventors and meet certain benchmarks like demonstrating technical feasibility, commercial potential and patentability before moving forward with creating a corporate entity or cofounders agreements.

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